Prospect: Your prices are OK. But our payment policy lets us work only T/T 45 days after B/L.
You: Sorry, but we work only [30% in advance and the balance before shipment.]
Prospect: [lost comm.]
How many times have you not done business with a prospect just because you had doubts about them?
How many times have you abandoned a deal because you did not have enough capital to produce such a high volume order?
How many times have you ended a negotiation due to not being able to agree on payment terms?
How many times have you been afraid to fail to fulfill such a big order out of lack of finance?
How many times has the financing impasse hindered your business?
Price negotiation is the biggest challenge in international trade. Especially if the parties are contacting each other for the first time. Neither knows how reliable their counterpart is. So the biggest fight comes out in the pricing phase.
However, it doesn’t necessarily have to be like that. There are quite a few finance products that you can benefit from when you have insufficient funds, the transaction is risky or even when you accept the payment after you deliver your goods, but you can receive the payment in advance.
In order to benefit from all available financing instruments, we need to know what they are and what kind of institutions there are to provide us with these services. Here they are:
Central banks are independent national authorities that are responsible for conducting monetary policy and financial regulations.
While their main task is to stabilize the currency and prevent inflation, they can provide services to exporters that help them compete in international markets. For example they could grant subsidized rates to exporters.
Commercial banks are financial institutions that provide governments, businesses and individuals with loans, deposits and various financing solutions.
They offer exporters and importers not only credits, but also they play an importer role as the intermediary or guarantor between the parties.
Both multinational and national banks cater to the financial needs of businesses. Multinational banks can surpass national banks as they have a global network and expertise in handling international trade finance.
National banks, on the other hand, can have a worldwide network of corresponding banks and cooperate with other multinational banks. Depending on the country, national banks could have an edge over multinationals in terms of having access to export financing facilities offered by their central banks.
Export/Import (EXIM) Banks
EXIM banks are generally quasi-government export credit agencies supported by the governments to help their exporters by providing loans, guarantees, and insurance services.
They also offer these services to foreign buyers so they can buy from their exporters. By doing so, they aim at helping their exporters to be more competitive and attract buyers in international markets.
As these banks are not actually banks, they do not work like commercial banks, they offer their services through the commercial banks.
Export Credit Agencies
Export credit agencies (ECA) are, like EXIM banks, financial institutions that offer financing for exporters. These agencies could be quasi-government or private organizations.
The finance that EACs provide are mostly for the medium (2>5 years) to long term (5> 10 years). Their services include loans, financial guarantees and credit insurance.
Export credit agencies use three methods to provide funds to buyers:
Direct Lending: This is provided upon the purchase of goods from businesses in the exporting country.
Financial Intermediary Loans: Here, the export–import bank lends funds to a financial intermediary, such as a commercial bank, that in turn loans the funds to the importer.
Interest Rate Equalization: Under an interest rate equalization, a commercial lender provides a loan to the importer at below market interest rates, and in turn receives compensation from the export–import bank for the difference between the below-market rate and the commercial rate.
Allianz Trade for example is one the export credit agencies.
Trade Finance Houses
Trade finance houses are non-bank financiers that offer exporters and importers trade credit either for a fee, commission or as a partner.
Unlike ECAs, they usually concentrate on a specific geographic region or product. Thus they have knowledge and experience in the given industry or market which allow them to guide their clients inking the best terms and even carrying out the shipment organization.
What’s more, they can also find buyers or suppliers for their clients.
Factoring houses are financial firms that specialize in purchasing accounts receivable (long or short term) from exporters at a discount, and at that point the factor assumes the risk of collecting the receivables.
Additionally their services include credit assessment and credit insurance. The banks and trading houses also can operate as factoring houses.
Forfaiting houses are financial firms that purchase accounts receivables from the exporter in return for cash payment at a discount and without recourse.
By account receivable, we are usually talking about a bill of exchange. The exporters sell these papers to the forfaiting houses in order not to wait for maturity.
Forfaiting houses may on-sell the bills of exchange (without recourse) to secondary markets.
Which one to choose?
In order to come up with the ideal product, you need to determine on what phase you’ll need it. Will you need a short, medium or long term financing?
Short term financing refers to mostly 360 days while medium term 1 to 3 years and long term 3 to 5 years.
So we can infer from the terms that most of the pre and post shipment apply to short term financing, whereas medium and long term financing is used to finance sales or purchase of capital equipment or various construction projects.
As the commissions and fees of finance providers like factoring houses, forfaiting houses and trade finance houses will increase according to the amount, due and level of the risk of the receivables, it’s only reasonable for short term financing (pre-shipment or post-shipment).